ACCG305- Auditing and Assurance Services

Case Study Assignment

Part 1- Materiality
Materiality is basically an amount that makes the difference to the users as an audit never offers and
provides 100% but only provides reasonable assurance. Although determining materiality includes the
professional judgment but In this case I am taking Profit before Tax, turnover, total Assets and equity as
a bench mark because so I have taken this as a base or benchmark to calculate the planning materiality.

Base/type 30 Sep 2011 Percentage Materiality

Profit before Tax 2,443,734 5% 122,186.7

Turnover 35,329,043 5% 1,766,452

Total Assets 24,589,854 0.5% 122,949.3

Equity 5,789,186 1% 57,891.86

Total Planning 1,946,531

Materiality (out of Total
Assets)

As it was mentioned in the appendix that the companys revenue is anticipated to increase 3% in the
year 2011, therefore, I have increased the revenue (turnover) by 3%. Moreover, with that increased
revenue, other calculations have been performed such has PBI, total assets and Equity along with their
written percentages.

Part 2- Analytical Procedure

Year Year ending

ending September 30
September
30
Description Formula 2011 2010

Current Ratio Current Asset/Current Liabilities 2.22 1.38

Quick ratio Quick Assets/Current Liabilities 1.65 1.009
Accounts receivable Turnover Sales/Average Receivable 3.30
3.27
Debt to equity Total debt/Total equity 3.47 3.24
Net income ratio Net income/Sales(Revenue) 6% 3%
Return on Equity Net income/Total Equity 37% 18%
Explanation

As far as the analytical review and analysis is concerned, as I have calculated the ratios, We can see that

the current ratio in the year 2010 was 1.38 which was increased to 2.22 in the year 2011. Current ratio

highlights that the company has sufficient funds to meet its short term obligations and in this case, even

in 2010 the company maintained a very good ratio higher than 1 which is almost doubled in the year

2011 which shows a very positive trend as far as meeting the companys short term goals are concerned.

Secondly the quick ratio which excludes the inventory also shows exactly a ratio of 1 in the year 2010

which was increased to 1.65 in 2011 this happened because in 2011 there is a lot of cash injection and

the companys current position seems quite stable.

As far as the Accounts receivable turnover is concerned, the company had the turnover of 3.3 times in

2010 which decreased with a very negligible point in 2011 and now has a receivable turnover of 3.27

times which means that every year the company is able to receive from its customers three times which

means a good AR turnover. The company debt to equity ratio doesnt show a good image in both the

years, In 2010 the Debt to equity ratio was 3.24 where as in 2011 it was slightly increased to 3.47 which

means that the company has three times more debt than its equity and the company is operating more

by Debt financing rather than equity financing.

The companys Net income ratio shows that in 2010 the companys net income margin was 3% which

was grown to 6% in the year 2011 which shows that the company is really striving hard to maximize its

profits in order to decrease its debts. Lastly the companys Return on Equity shows 18% in the year 2010

which was increased to 37% in the year 2011,this is because the companys profits has also increased in

2011.
Overall the company projects a stable position in terms of its short and long term obligations but the

company really needs to minimize its Debt in the year future so as to avoid the increasing borrowing

cost.
B. Common Size balance Sheet-2010 & 2011 (Taken Total Assets as the base)

Cloud 9
common- size Balance sheet
% As of
As of 2010 As of 2011 % As of 2010 2011
Current Assets

Cash Assets 1,753,765 245,965 7% 1%

Trade receivable 10,701,064 10,552,109 44% 43%

Inventory 6,263,242 6,300,136 25% 26%

Financial Assets 4,075,205 4,469,759 17% 18%

Prepayments and other Assets 666,054 1,112,028 3% 5%

Total Current Assets 23,459,329 22,679,997 95% 93%

Non current Assets

Property, Plant and Equipment 852,965 1,449,330 3% 6%

Deferred tax Assets 277,559 346,949 1% 1%

Total Non current Assets 1,130,524 1,796,279 5% 7%

Total Assets 24,589,854 24,476,276 100% 100%

Liabilities and Equity

Current Liability

Payables 8,413,818 10,323,185 34% 42%

Interest Bearing liabilities 8,240,091 7,591,874 34% 31%

current Tax Liabilities 207,893 159,866 1% 1%

Provisions 189,015 401,658 1% 2%

Total current Liabilities 69% 75%

 17,050,818 18,476,583

Non-current Liabilities

Deferred Tax Liabilities 170,284 198,647 1% 1%

Interest Bearing Liabilities 1,500,000 - 6% -

Provisions 79,566 - 0.3236 % -

Total Non-current Liabilities 1,749,850 198,647 7% 1%

Total Liabilities 18,800,667 18,675,230 76% 76%

Equity

Issued capital 5,448,026 5,448,026 22% 22%

Reserves (259,948) (247,638) -1% -1%

Accumulated Losses 600,658 600,658 2% 2%

Total Equity 5,789,186 5,801,046 24% 24%

Total Liabilities and Equity 24,589,853 24,476,276 100% 100%

Explanation

As we can see from the common size Balance sheet of the year 2010-2011, that we can see that there is

so much cash taken out in the year 2011 which is required to be taken seriously as to where the cash

has been invested or taken out from the business. Other current assets shows fine position but we can

see that the company has almost doubled its prepayments and other assets in the year 2011. The

company has also invested in Property, plant and equipment so it needs to be identified whether the

cash has been taken for the purchase of Non-current assets or not. The Payables has also been

increased in the year 2011 and payables show that they are 42% of the total assets which means 42% of
the total assets has been purchased using any form of payable such as loan or any other kind of debt.

Other things remain almost same but the cash taken out from the business in 2011 needs to be taken

into serious consideration.

C. Memorandum

To : Suzie Pickering

From : W&S Partners

Date: 4-April-2017

Subject: Overall financial Position of the company

This Memo has been written to inform you the changes happened in the year 2011 from 2010, The

summary of the important factors to consider is as follows:

1. The Total revenue Change: firstly I would like to talk about the changing in the overall revenue

of the company, the whole sale revenue has been decreased in the year 2011 from 33,987,595

to 27,255,417 which means that almost 19.8% the revenue has been decreased,this needs to be

watch seriously that why this has happened.

2. Advertising and Promotion Expense: Moreover Advertising, sales and promotion expense has

been increased in the year 2011 by a massive number.

3. Insurance Expense: In the same manner insurance expense has been increased to 20,65,096 in

2011 from 15,97,469 in 2010.

4. Current and Quick Ratio: As far as the current and quick ratio is concerned, we can see that the

current ratio in the year 2010 was 1.38 which was increased to 2.22 in the year 2011 even in

2010 the company maintained a very good ratio higher than 1 which is almost doubled in the
 year 2011 which shows a very positive trend as far as meeting the companys short term goals

are concerned. Secondly the quick ratio which excludes the inventory also shows exactly a ratio

of 1 in the year 2010 which was increased to 1.65 in 2011.

5. Account receivable Turnover: The account receivable turnover shows the company had the

turnover of 3.3 times in 2010 which decreased with a very negligible point in 2011 and in 2011

has a receivable turnover of 3.27 times which means that every year the company is able to

receive from its customers three times which means a good Accounts receivable turnover.

6. Solvency and Profitability: As far as the solvency is concerned. The company is more inclined

towards debt financing due to which it has increased its short and long term payables that

needs to consider in the near future avoiding more debt over the company. Nevertheless, the

company is able to generate good Return on equity and profitability in both the years.

7. Inventory: The company is maintaining quite a lof of inventory in its warehouse which is

somehow adding an additional cost to the company, in both the years the companys inventory

balance is quite much that needs to be sold out soon to avoid the inventory costs.

8. PPE: The company has invested more in PPE in the year 2011 which can be seen from the

common size balance sheet of both the years.

9. Increase in Payables: As I already mentioned that the company has increased its payables in the

year 2011 because of additional debt in the company, also the payables has been increased

because of an increase in Hedge payable, I/C Payable and other Accrued Expenses.

10. Special disclosures: It is important to understand that misrepresentation can happen in the

financial statements of the company as I have already mentioned that the cash ejection in the

year 2011 needs to be monitored closely in order to find out the exact reason for it.